• EU bank stress tests weaken the Euro, pushing GBP/EUR rates to 1 month high • Talk of US QE weakens USD, causing GBP/USD to rise • Weak UK data keeps Sterling’s gains limited despite this • Round up of the week’s data that may affect rates
At the beginning of the week the EU debt crisis seemed to have resurfaced with the Euro and European shares falling on concerns that the debt crisis in the Eurozone may spread to Italy and Spain. The concern is that Italy and Spain may have to follow Greece, Portugal and the Republic of Ireland and seek a European Union and International Monetary Fund (IMF) bail-out.
This news had significantly weakened the Euro, and GBP/EUR exchange rates had surged as a result. Just a week ago rates were in the €1.10's, and on Monday morning they were around €1.14. It's important to remember that Sterling is still fundamentally weak, and it's only the debt news from the EU that has caused the recovery.
Midweek data showed a sharp rise in the number of Britons claiming unemployment benefit, adding to concerns that stale growth prospects may prompt more Bank of England policymakers to call for additional quantitative easing and further scope to keep interest rates at record lows.
Toward the latter part of the week, sterling punched a one-month high against the euro ahead of European bank stress tests putting focus squarely on the euro zone banking industry. The results of Europe-wide stress tests on 90 banks could force some banks to seek further state aid. When the figures were released at 5pm on Friday, the Euro initially strengthened slightly as most major banks passed the test. Largely rates are unchanged however, as the results were widely expected and as such already priced into exchange rates.
Looking to the week ahead GBP/EUR could struggle to extend its current levels on a sustainable basis with the release of the BoE (Bank of England) minutes this week. This could signal a further shift in the balance of short-term risks. Markets expect the BoE to keep rates on hold until well into the second half of 2012. In contrast the European Central Bank has raised rates twice this year, leaving euro zone rates at 1.5 percent, three times that of the UK.
In summary, despite very poor UK data dragging Sterling down, GBP/EUR rates are the best they have been for a month due to the EU debt crisis. For those buying Euros, you may wish to consider locking in the current rate with a Forward contract, protecting you against a return to the levels of €1.10 we saw a week ago. Conversely if you are selling Euros, further developments from Europe could cause the Euro to weaken further, so the market is currently extremely volatile and could move either way.
The volatility of the market over the past week illustrates the importance of keeping in regular contact with your FCG Account Manager. It’s worth having a free consultation on the contract types we offer, to protect against adverse exchange rate movements and ensure your currency does not cost more than necessary.
Sterling vs. US Dollar;
Early London Trade kicking off last week resulted in Sterling losing over half a pre-cent against the US dollar, tracking losses in a broadly weak euro as concerns that Italy may be the next country to be affected by the euro zone debt crisis prompted investors to seek safety in the U.S. currency. Sterling clambered back from a 5-month low versus the dollar in volatile trade on Tuesday but analysts suggest the outlook for the pound as weak after UK inflation unexpectedly eased, denting slim rate hike expectations.
U.S. Federal Reserve Chairman Ben Bernanke hinted at the possibility of more monetary policy easing if the economy weakens and inflation moves lower adding to the dollar’s decline midweek. The U.S. currency fell broadly in response, pushing the pound up more than 1 per-cent which took it more than 3 full cents above Tuesday's five month low. Gains for the pound are expected to be limited, with many not ruling out the prospect of further quantitative easing in the UK too.
The last two days of the week were perhaps the most volatile with Sterling near a three week high as investors stepped up sale of the U.S. dollar after Moody's and Standard & Poor's threatened to downgrade the United States' prized AAA credit rating unless the Obama administration and Congress find a way to slash the yawning federal budget deficit within two years.
Chairman Bernanke said that a Treasury default would be "a calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy but the global economy." Whilst the market has always assumed the threat of default would force a compromise, concerns are growing that some Republicans actually want to see the government default.
With the continuing political wrangling in the US and uncertain global economic forecasts causing a sharp increase in market volatility, last week’s events presented ideal buying and selling opportunities and highlight the necessity to keep in close contact with your FCG account manager.
Weekly Economic Data that may affect exchange rates
Below are the main releases for the week ahead. For a free consultation on how these releases could affect the cost of your currency requirement, open an account with us today. This is free to do, doesn’t obligate you in any way, and simply gives you access to our market knowledge and commercial exchange rates.
Monday – Today is quite quiet data wise, with only some Housing data from the UK and USA.
Tuesday – Australia releases its minutes to the recent interest rate decision, the EU releases measures on economic sentiment and construction output, and the USA has some number showing Housing Starts and building permits. There is also an interest rate decision from Australia.
Wednesday – Today we see the minutes to the recent BoE decision to hold interest rates. Any talk of Quantitative easing in the notes may cause Sterling to fall. Germany has some inflation numbers today, and the EU releases consumer confidence measures, which are unlikely to be good in light of the debt problems.
Thursday – Today is busy for Fundamental data. Starting in the EU, we have various measures of inflation, which could support the cause for further interest rate hikes in the EU, which may strengthen the Euro. In the UK we have Retail sales and a measure of Public Sector borrowing. From the US we see various measures of unemployment.
Friday – From the Eurozone today we see Industrial orders, showing the health of this sector. We also have confidence measures from Germany, the largest economy in the EU. In Canada we have retail sales and inflation data.
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